Why Trump’s Fed Pick, GOP Tax Plan Should Bolster Private Markets

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No doubt you’ve heard: President Donald Trump has appointed Federal Reserve governor Jerome Powell to be the next Fed chairman. Assuming US Senate approval, Powell would replace Janet Yellen when her term expires in February.

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Widely viewed as a policy centrist likely to continue the cautious, pro-stimulus approach of his two predecessors, Powell is not without notable characteristics: He is set to be the first person without a Ph.D. in economics to lead the Fed in 40 years, as well as the richest Fed chairman since 1948, thanks to a successful career in investment banking and private equity that included nearly a decade at The Carlyle Group. And, despite Republican bonafides, he enjoys a modicum of bipartisan support.

Powell (pictured) was nominated by President Barack Obama to the Fed board in 2011, lobbied Republicans in Congress to extend the debt ceiling later that year and was confirmed by the Senate in 2012—despite some Republican criticism stemming from a belief that he was too supportive of then-Fed chairman Ben Bernanke's policy easiness. He's the second Carlyle alum to be appointed to the Fed by Trump, joining Randal Quarles, who was confirmed as a Fed governor last month and serves as vice chairman of supervision. Powell was a Carlyle partner from 1997 to 2005 and founded the industrial group within the firm's US buyout division.

Powell's selection—beating out other candidates who were more critical of the Fed's current strategy—represents a turnabout of sorts for Trump, who was critical of Yellen's low-rate stance on the campaign trail but now considers himself a "low-interest-rate person" and has praised Yellen's performance.

Powell, in recent speeches, has sounded a dovish note: He thinks an extended period of low interest rates is warranted (on the belief that the "natural" interest rate has been lowered by the financial crisis), as long as inflation remains tepid. He has also been critical of a "rules-based" approach to monetary policy—an approach that is a dog whistle to those who believe the Fed's policies have gone too far and become unhinged.

Private markets, as I explored recently, have been big beneficiaries of the Fed's cautious policy stance and delicate rate hike trajectory. In fact, despite the start of a balance sheet roll-off and nearly two years into its tightening campaign, the Fed is largely sitting and watching as financial conditions continue to ease, despite an ever-tightening labor market and soaring financial asset valuations.

GOP tax plan appears to be net positive

The Powell news also comes in the context of the release of the Republican tax plan outline out of the House of Representatives. The details of the plan were largely as expected, with a lowering of the corporate rate to 20%, a 30% limit to interest deductibility, the maintenance of the carried-interest loophole, and a low one-time tax rate on repatriated profits.

All of this, along with eased capital expenditure expensing rules, should be a boon to PE and buyout firms that rely on financial engineering and tax efficiencies to bolster returns, as well as VC investors funding rapid growth. (The shares of publicly traded private equity and alternative asset managers finished the day mixed after recovering from mid-day weakness as the plan was initially released.)

Of course, this sentiment is malleable, depending on changes to the tax bill as it works its way through the legislative process. But for now, it appears to be a net positive for the industry in the aggregate.

Overall, the Committee for a Responsible Federal Budget estimates that nearly 70% of the tax cuts over the next 10 years would go to businesses of all types. This, in combination with Powell's dovishness at the Fed, means fair winds should continue to fill the sails of VC, PE and M&A activity.
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Article by Anthony Mirhaydari, PitchBook

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